S&P cuts Cerberus-backed Yellow Pages debt rating on print woes, competition

  • S&P Global sees possible violation of covenants later this year
  • Research firm sees YP’s financial commitments unsustainable
  • No default expected over the next 12 months

S&P Global Ratings said YP Holdings LLC, the Cerberus Capital Management-backed entity that owns the Yellow Pages directories and other properties, remain vulnerable to refinancing risk in the face of weakness in both its print and digital business lines.

S&P cut its view on the company’s debt to CCC+ from B, with a negative outlook. The CCC rating means the company is vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments, according to S&P’s definitions.

“The negative rating outlook reflects our view that YP’s financial commitments appear unsustainable for the next two years, although we don’t expect a default during the next 12 months,” S&P said in a research note. “The outlook also reflects our assumption that the company could face difficulties refinancing its asset-based revolving credit facility and senior secured loan due June 4, 2018, which could lead to a payment default.”

Facing a possible covenant breach later this year, S&P said it’s likely YP will obtain relief before Sept 30, but it added the amendment process is taking longer than it expected.

Last year, YP’s print directory business saw its revenue fall 22.5 percent in 2015. S&P expects the rate of decline to speed up in 2016 and 2017. “We view the company’s stand-alone print business as economically unviable” that will wind down over the next three to four years, S&P said.

YP’s digital business, which accounted for nearly $1 billion in revenue in 2015, provides digital marketing services for small- and mid-sized businesses, with 60 million monthly unique visitors and 225,000 digital advertisers.

“Despite the company’s scale, revenue growth at YP’s digital business has been anemic since 2010, and we believe the company has lost market share while the broader industry has had a continuous annual growth rate of more than 10 percent,” S&P said.

S&P expects the company’s digital unit to decline in 2016 and 2017.

“We view the online local search and advertising markets as intensely competitive and influenced by large industry participants, such as Google Inc and Facebook Inc, which have significant technological expertise and financial resources.”

YP has been a portfolio company of Cerberus since 2012, when the buyout and debt specialist paid $950 million for a 53 percent stake in the company to AT&T Inc, which remains a minority holder, according to reports.

YP Holdings reportedly prepared a bid to merge with Yahoo in April, but no deal has been publicly announced. At that time, YP was said to be working with Goldman Sachs on strategic alternatives. Cerberus did not return an email.

Action Item: Yellow Pages, http://www.yellowpages.com/?re=yp

Photo: John Snow, chairman of Cerberus Capital Management, L.C., addresses the Detroit Economic Club about ‘The New Face of Private Investment’ in Rochester, Michigan July 11, 2007. REUTERS/Rebecca Cook